UK Economic Growth Fizzles Out as Jobs Market Weakens and Trade Shock Bites

Strategic Insights -

Analysts warned that the UK's burst of strong economic growth at the start of the year is beginning to fizzle out as the jobs market weakens, the trade shock bites, and higher taxes damp business optimism. The strong start to the year, driven by one-off factors, does not look sustainable, and economists expect weak growth for the rest of the year. The risk of a familiar pattern emerging, where a strong first quarter is followed by slow growth, is increasing, with analysts forecasting that GDP will barely grow in the current quarter.

Key Takeaways:

  • The UK's economic growth is slowing down, with GDP growth expected to be barely 0.1% in the current quarter, following a strong 0.7% growth in the first quarter.
  • The jobs market is weakening, with payrolled employment falling by 109,000 in May, the largest single-month contraction since May 2020.
  • Businesses are being hit by a "wave of cost increases" driven by government policy, including Labour's decision to increase employer national insurance, the rise in the national living wage, and tougher packaging recycling regulations.
  • Firms are encountering mixed success in passing on those cost rises, leading to employee headcount and working hours being reduced, and wage settlements being delayed.
  • The Bank of England's network of regional agents reported that firms in sectors including retail, manufacturing, and construction expect no rebound in customer demand this year.
  • Analysts warned that the trade shock, driven by the US-China trade war, and higher taxes will weigh on the economy for the remainder of the year.
  • This pattern is a familiar one, with GDP growth consistently stronger in the first quarter than in the following ones since the pandemic.
  • Analysts stressed that it is too soon to write off 2025, given that there is still relatively little hard data tracking the second quarter of the year.

Statistics:

  • GDP growth is expected to be barely 0.1% in the current quarter, following a strong 0.7% growth in the first quarter.
  • Payrolled employment fell by 109,000 in May, the largest single-month contraction since May 2020.
  • The volume and value index for retail sales fell back to growing significantly in May.
  • Unemployment rates rose to 4.6% in May.
  • Job vacancies ('000) fell to 1,000 in May.
  • Payrolled employees (mn) fell to 30.6 million in May.
  • The Bank of England's network of regional agents reported that firms expect no rebound in customer demand this year.

Sources:

  • "UK GDP growth is slowing down, with GDP growth expected to be barely 0.1% in the current quarter, following a strong 0.7% growth in the first quarter." - Reuters
  • "Payrolled employment fell by 109,000 in May, the largest single-month contraction since May 2020." - Office for National Statistics (ONS)
  • "Firms are encountering mixed success in passing on cost rises, leading to employee headcount and working hours being reduced, and wage settlements being delayed." - Bank of England
  • "Analysts warned that the trade shock, driven by the US-China trade war, and higher taxes will weigh on the economy for the remainder of the year." - Neville Hill, co-founder of consultancy Hybrid Economics